Special Section 457(b) Catchup for Government Plans

A benefit of 457(b) plans is that participants have the opportunity to contribute the maximum deferral contribution to both the 457(b) plan and another qualified plan. Teachers, for example, often have access to both, a 403(b) plan and a 457(b) plan. In those cases, they can contribute the maximum deferral to both plans. 403(b) and 401(k) plans must be aggregated to compute the maximum annual deferral limit at the individual level. As a result, one individual can contribute $17,500 per year (2014 limit) to a combination of 457(b) plans and an additional $17,500 to a combination of 401(k) and/or 403(b) plans, as applicable. That brings the maximum annual deferral to $35,000 for 2014, and that doesn’t even include catch-up contributions for participants who are 50 or older and special catch-up contributions for which the participant may be eligible under a 403(b) or a 457(b) plan.

Participants can make special catch-up contributions to a governmental 457(b) plan in one or more of the three taxable years prior to attaining normal retirement age. However, the $5,500 catch-up contribution available for participants who are age 50 or older cannot be made in conjunction with the special section 457(b) catch-up.

The maximum special catch-up amount is the LESSER of

a) Twice the current year’s maximum, or $35,000 for 2013 or

b) The underutilized maximum amounts for prior years.

Determining the underutilized limitation can be quite a challenge. The computation requires an analysis dating back to years beginning after December 31, 1978. From that initial year through years in effect prior to 2002, amounts contributed to ALL employers for whom a participant has performed services must be taken into account, as opposed to limiting the analysis to contributions made to the participant’s current eligible employer. The coordination limitation applicable to pre-2002 coordination plans takes into account amounts excluded from the participant’s income for any prior taxable year by reason of a nonelective employer contribution, salary reduction or elective contribution under any other eligible section 457(b) plan, or a salary reduction or elective contribution under any 401(k) qualified cash or deferred arrangement, section 402(h)(1)(B) simplified employee pension (SARSEP), section 403(b) annuity contract, and section 408(p) simple retirement account, or under any plan for which a deduction is allowed because of a contribution to an organization described in section 501(c)(18) (pre-2002 coordination plans). Similarly, in applying the section 457(b)(2)(B) limitation for includible compensation for years prior to 2002, the limitation is 33-1/3% of the participant’s compensation includible in gross income.

Regulation Section 1.457-4 provides an example of the above computation, which we have abbreviated below:

Facts:

Participant defers $3,000 into an eligible plan during the 2000 plan year.

Participant’s employer contributes a fully vested $1,000 match.

The 49-year-old participant’s wages are $15,000, and he is not eligible to participate in any other plans.

Since the participant’s includible compensation is $12,000 ($15,000 gross wages – $3,000 deferrals) and the applicable limitation for 2000 was 1/3 of the individual’s includible compensation (33-1/3% x $12,000 = $4,000), then the participant’s annual addition of $4,000 ($3,000 deferral + $1,000 match) = the limitation of 457(b) for 2000 and as such, the participant’s underutilized amount for 2000 is ZERO ($4,000 limit – $4,000 contributions).

Computing the maximum 457(b) special catch-up contributions can be challenging and it requires a lot of recordkeeping. Both plan sponsors and their record keeper should ensure that there are reliable processes in place to ensure that special catch-up contributions are accurately computed and that only eligible participants within 3 years of normal retirement age can contribute them. Both government and private 457(b) plans are an efficient way for participants to double their available deferral contribution maximum, so long as the total contributions don’t exceed 100% of the participant’s compensation.

Belfint Lyons Shuman is a Certified Public Accounting firm that focuses on conducting audits of 401(k) Plans, Profit Sharing Plans, 403(b) Plans, Taft-Hartley, collectively bargained and defined contribution plans, in Delaware(DE) and Philadelphia (PA). Our team has experience conducting 401(k), 403(b), and large plan audits for plans with 120 participants to those with over 8,000 total participants. We also have experience with first-year 401(k) and other plan audits.